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Portfolio Matrices McKinsey's Industry Attractiveness/Company Strength Matrix High Invest, grow Company Strength Medium Maintain position, concentrate on segment Divest, Low withdraw Low Medium High Industry Attractiveness Source: Rowe, et al., 1994:257 Directional Policy Matrix (DPM) Diversification Market Market leadership; High segmentation innovation Company Capability Phased Maintenance of Expansion; Normal withdrawal; position; product merger market Differentiation penetration Imitation; Cash Low Divestment Phased generation withdrawal Unattractive Average Attractive Market Potential Source: Rowe, et al., 1994:257 The Growth-Share Matrix Matrix Relative Market Share High Low Market Growth Star Question Mark High Low Cash Cow Dog Dimensions of the Matrix 19x1 19x0 J External: Market growth rate (%) = Total market - Total market x 100 (year 19xl) Total market 19x0 19xl Business sales J Internal: Relative market share = Leading competitor's sales (year 19xl) 19xl Cut-off points J Horizontal: Industry growth rate, or GNP growth rate, or weighted average of in- dustries growth rate, or managerial objective for overall growth J Vertical: Relative market share equal to 1 for separating leadership from fol- lowership, or equal to 1.5 to indicate strong leadership or dominance Source: Hax & Majluf, 1991:186 Business Market Share Business Investment Net Cash Category Thrust Profitability Required Flow Around zero or Stars Hold/increase High High slightly negative Cash Cows Hold High Low Highly positive Increase None or negative Very high Highly negative Question H Marks Harvest/ Low or negative Disinvest Positive Divest Harvest/ Dogs Low or negative Disinvest Positive Divest H There is a selective application of the strategy depending on the decision made with regard to the business: either to enter aggressively or withdraw. Source: Hax & Majluf, 1991:186 The Industry Attractiveness-Business Strength Matrix Matrix Industry Attractiveness High Medium Low Investment High Selectiv Selectivity and e growth Business Strength growth Selectiv Harvest/ Medium e Selectivity Divest growth Harvest/ Harvest/ Low Selectivity Divest Divest Dimensions of the Matrix J Industry Attractiveness: Subjective assessment based on external factors, noncontrollable by the firm, that are intended to capture the industry and competitive structure in which the business operates J Business Strength: Subjective assessment based on the critical success factors, largely con- trollable by the firm, that define the competitive position of a business within its industry Source: Reproduced from A.T. Kearney, Inc., Chicago, III. by Hax & Majluf, 1991:187 Generic Strategies Industry Attractiveness High Medium Low Identify growth segments Maintain overall position Grow Invest strongly Seek cash flow High Seek dominance Maintain position Invest at maintenance Maximize investment elsewhere level Business Strength Evaluate potential for leadership via Identify growth segments Prune lines Medium segmentation Specialize Minimize investment Identify weaknesses Invest selectively Position to divest Build strengths Trust leader's Specialize Specialize statesmanship Low Seek niches Seek niches Sic on competitor's Consider acquisitions Consider exit cash generators Time exit and divest Source: Reproduced from A.T. Kearney, Inc., Chicago, III. by Hax & Majluf, 1991:187 The Life-Cycle Portfolio Matrix (Hax & Majluf, 1991:188-192) Matrix Maturity Embryonic Growth Mature Aging Dominant Strong Competitive Position Favorable Tenable Weak Nonviable Wide range of strategic options Caution, selective development Danger, withdraw to market niche, divest or liquidate DEVELOPMENT STAGE Dimension of the Matrix DESCRIPTORS Embryonic Growth Mature Aging Market Growth Accelerating; Faster than GNP, Equal to or slower Industry volume JExternal: Rate meaningful rate but constant or than GNP, cyclical cycles but declines Stages of industry maturity judgmentally cannot be calculated decelerating over long term assessed based on the following eight because the base external factors and their corresponding is too small description Industry Usually difficult to Substantially exceeds the Well-known; Saturation is reached; Potential determine industry volume, but is primary markets no potential remains subject to unforeseen approach saturation developments industry volume Breadth of Basic product Rapid proliferation Product turnover, but Shrinking Product Lines line established as product lines are little or no change extended in breadth Number of Increasing rapidly Increasing to peak; Stable Declines; but business Competitors followed by shake-out may break up into and consolidation many small regional suppliers Market Share Volatile A few firms have major Firms with major Concentration Stability shares; rankings can shares are entrenched increases as marginal change, but those with firms drop out; minor shares are or shares are dispersed unlikely to gain major among small local shares firms Purchasing Little or none Some; buyers are Suppliers are well Strong; number of Patterns aggressive known; buying alternatives patterns are estab- decreases lished Ease of Entry Usually easy, but Usually easy, the presence Difficult; competitors Difficult; little opportunity may of competitors is offset are entrenched, incentive not be apparent by vigorous growth and growth is slowing Technology Concept development Product line refinement Process and materials Role is minimal and product and extension refinement; new engineering product line development to renew growth Dimensions of the Matrix (cont.) J Internal: Competitive position of the business arrived at judgmentally, based on the following six com- petitive categories: Criteria for Classification of Competitive Position 1. Dominant: Dominant competitors are very rare. Dominance often results from a quasi monopo- ly or from a strongly protected technological leadership. 2. Strong: Not all industries have dominant or strong competitors. Strong competitors can usually follow strategies of their choice, irrespective of their competitors' moves. 3. Favorable: When industries are fragmented, with no competitor clearly standing out, the leaders tend to be in a favorable position. 4. Tenable: A tenable position can usually be maintained profitably through specialization in a nar- row or protected market niche. This can be a geographic specialization or a product specializa- tion. 5. Weak: Weak competitors can be intrinsically too small to survive independently and profitably in the long term, given the competitive economics of their industry, or they can be larger and po- tentially stronger competitors, but suffering from costly past mistakes or from a critical weak- ness. 6. Nonviable: Represents the final recognition that the firm has really no strength whatsoever, now or in the future, in that particular business, and therefore, exiting is the only strategic response. Generic Strategies A. Market share thrust Embryonic Growth Mature Aging All out push for share Hold position Hold position Dominant Hold position Hold share Grow with industry Hold position Attempt to improve Attempt to improve Hold position Hold position Strong position position or All out push for share Push for share Grow with industry Harvest Selective or all out Attempt to improve Custodial or maintenance Harvest Favorable push for share position or Selectively attempt to Selective push for Find niche and attempt Phased withdrawal improve position share to protect Selectively push for Find niche and Find niche and hang on Phased withdrawal Tenable position protect it or or Phased withdrawal Abandon Up Turnaround Turnaround Weak or or or Abandon Out Abandon Phased withdrawal B. Investment requirements Embryonic Growth Mature Aging Invest slightly faster Invest to sustain growth Reinvest as Reinvest as Dominant than market dictates rate (and preempt new [?] necessary necessary competitors) Invest as fast as market Invest to increase growth rate Reinvest as Minimum Strong dictates (and improve position) necessary reinvestment or Maintenance Minimum Selective investment to Minimum and/or maintenance Favorable Invest selectively improve position Selective Investment or reinvestment Disinvest Minimum Selective investment Disinvest or Tenable Invest (very) selectively reinvestment or Divest Disinvest Invest selectively Weak Invest or Divest Invest or Divest or Disinvest Divest The terms invest and divest are used in the broadest sense and are not restricted to property, plant, and equipment. C. Profitability and cash flow Embryonic Growth Mature Aging Probably Profitable Profitable Profitable Dominant profitable but not Probably net Net cash producer Net cash producer necessary cash producer Net cash borrower (but not necessary) May be unprofitable Probably profitable Profitable Profitable Strong Net cash borrower Probably net cash Net cash producer Net cash producer borrower Probably unprofitable Marginally profitable Moderately profitable Moderately profitable Favorable Net cash borrower Net cash borrower Net cash borrower Cash flow balance Unprofitable Unprofitable Minimally profitable Minimally profitable Tenable Net cash borrower Net cash borrower or Cash flow balance Cash flow balance Cash flow balance Unprofitable Unprofitable Unprofitable Unprofitable Weak Net cash borrower Net cash borrower or Possibly net cash (Write-off) Cash flow balance borrower or Net cash producer In addition, to cash throw-off or use, each unit may use or throw-off managerial resources. Note: In some cases, the tax shield value of a unit should be taken into account in evaluating unit performance. In addition to the previously prescribed generic strategies, the ADL methodology recommends broad action programs depending on the position of the business unit in its matrix. The strategies of business units are categorized according to four different families: natural development, selective development, prove viability, and out, which are broadly char- acterized in the following display. Stages of industry Maturity Embryonic Growth Mature Aging Competitive Position Dominant Strong Natural Favorable development Tenable Weak Out Source: Arthur D. Little, Inc. Each family of businesses has the following options regarding the definition of its strategic thrusts: Natural Development Selective Development Prove Viability Out Start-up Find niche Catch-up Withdraw Growth with industry Exploit niche Renew Divest Gain position gradually Hold niche Turnaround Abandon Gain position aggressively Prolong existence Defend position Harvest Once having selected the appropriate strategic thrust from among the ones available for each family, you are offered the following menu of broad action programs: A Backward integration M Market rationalization B Development of overseas business N Methods and functions efficiency C Development of overseas facilities O New products/New markets D Distribution rationalization P New products/Same market E Excess capacity Q Production rationalization F Export/Same product R Product line rationalization G Forward Integration S Pure survival H Hesitation T Same products/New markets I Initial market development U Same products/Same markets J Licensing abroad V Technology efficiency K Complete rationalization W Traditional cost-cutting efficiency L Market penetration X Unit abandonment The ADL methodology suggests the following mapping among families, strategic thrusts, and broad action programs: Generic Strategies Strategies A B C D E F G H I J K L M N O P Q R S T U V W X Strategic Thrust NATURAL DEVELOPMENT Start-up E I L Growth with industry A B C F G J N P T U Gain position gradually G L T Gain position aggressively B C E G L N O P T V Defend position A C N U V W Harvest D H K M Q R U W SELECTIVE DEVELOPMENT Find niche A G I L M R T Exploit niche B C E L N P U V Strategic Thrust Hold niche C D N Q U PROVE VIABILITY Catch-up D E L M P Q R Renew D M O P Q R U Turn around D L M N Q R V W Prolong existence A D F J K M N Q R S T W WITHDRAWAL Withdraw D M Q R W Divest D K Q R S Abandon X Source: Arthur D. Little, Inc. The Alternative Boston Consulting Group Matrix Matrix Size of Competitive Advantage Small Large (Opportunities for Ways to Compete differentiation) Many Fragmented Specialization Few Stalemate Volume Dimensions of the Matrix J Ways to Compete: Assess judgmentally whether there are many or few ways to achieve com- petitive advantage. This is greatly determined by the capabilities of dif- ferentiation within the industry. J Size of Competitive Advantage: Assess judgmentally whether the extent and sustainability of the advantage is small or large. This is largely dependent on the size of barriers to entry into the industry. Generic Strategy Category of Generic Business Strategy Volume J Lowest cost position, sales leadership Specialization J Either niche in a segment of the market or cover the entire market with differentiated products J Do not get stuck in the middle Fragmented J Many ways to compete. Look at your relative strengths and unique competencies Stalemate J Survive, reduce costs, maximize productivity Source: Hax & Majluf, 1991:193 Strategic Position and Action Evaluation (SPACE) (Rowe, et al., 1994:255-270) SPACE Chart High Company’s Financial Strength (FS) 6 Conservative 5 Aggressive 4 3 2 High Low 1 Low High -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 Company’s -1 Competitive Industry -2 Strength Advantage (CA) -3 (IS) High -4 Defensive -5 Competitive -6 Environmental Stability (ES) Low AGGRESSIVE POSTURE Strength on all FS . Aggressive dimensions CA IS ES This posture is typical in an attractive industry with little environmental turbulence. The company enjoys a definite competitive advantage, which it can protect with financial strength. The critical factor is entry of new competition. Firms in this situation should take full advantage of opportunities, look for acquisition candidates in their own or related industries, increase market share, and concentrate resources on products that have a definite competitive edge. Source : Rowe, et al., 1994, p.260. COMPETITIVE POSTURE Competitive FS advantage in good industry... CA ...but relative IS weakness in financial and environmental stability ES . Competitive This posture is typical in an attractive industry. The company enjoys a competitive advantage in a relatively unstable environment. The critical factor is financial strength. Firms in this situation should acquire financial resources to increase marketing thrust, add to the sales force, extend or improve the product line, invest in productivity, reduce costs, protect competitive advantage in a declining market, and attempt to merge with a cash-rich company. Source : Rowe, et al., 1994, p.260. CONSERVATIVE POSTURE Conservative . FS Financially sound... CA IS ...but market is very competitive and it is waning ES This posture is typical in a stable market with low growth. Here the company focuses on financial stability. The critical factor is product competitiveness. Firms in this situation should prune the product line, reduce costs, focus on improving cash flow, protect competitive products, develop new products, and gain entry into more attractive markets. Source : Rowe, et al., 1994, p.260-261. DEFENSIVE POSTURE FS CA IS . Defensive ES Relative weakness on ost dimensions This posture is typical of an unattractive industry in which the company lacks a competitive product and financial strength. The critical factor is competitiveness. Firms in this situation should prepare to retreat from the market, discontinue marginally profitable products, reduce costs aggressively, cut capacity, and defer or minimize investments. Source : Rowe, et al., 1994, p.261. Factors Determining Environmental Stability : R C E Technological changes Many 0123456 Few Rate of inflation High 0123456 Low Demand variability Large 0123456 Small Price range of competing products Wide 0123456 Narrow Barriers to entry into market Few 0123456 Many Competitive pressure/rivalry High 0123456 Low Price elasticity of demand Elastic 0123456 Inelastic Pressure from substritute products High 0123456 Low Note : R = Relative importance of factor C = Chance of sustaining E = Combined effect Factors Determining Industry Strength : R C E Growth potential Low 0123456 High Profit potential Low 0123456 High Financial stability Low 0123456 High Technological know-how Simple 0123456 Complex Resource utilization Inefficient 0123456 Efficient Capital intensity Low 0123456 High Ease of entry into market Easy 0123456 Difficult Productivity, capacity utilization Low 0123456 High Manufacturers’ bargaining power Low 0123456 High Note : R = Relative importance of factor C = Chance of sustaining E = Combined effect Factors Determining Competitive Advantage: R C E Market share Small 0123456 Large Product quality Inferior 0123456 Superior Product life cycle Late 0123456 Early Product replacement cycle Variable 0123456 Fixed Customer loyalty Low 0123456 High Competition’s capacity utilization Low 0123456 High Technological know-how Low 0123456 High Vertical integration Low 0123456 High Speed of new product introductions Slow 0123456 Fast Note : R = Relative importance of factor C = Chance of sustaining E = Combined effect Factors Determining Financial Strength : R C E Return on investment Low 0123456 High Leverage Imbalanced 0123456 Balanced Liquidity Imbalanced 0123456 Solid Capital required versus capital available High 0123456 Low Cash flow Low 0123456 High Ease of exit from market Difficult 0123456 Easy Risk involved in business Much 0123456 Little Inventory turnover Slow 0123456 Fast Economies of scale and experience Low 0123456 High Note : R = Relative importance of factor C = Chance of sustaining E = Combined effect Strategic Options and Generic Strategies Status Quo Concentric FS Diversification Conglomerate Diversification Overall Concentration Focus Cost Leadership Diversification Vertical Conservative Aggressive Integration CA IS Divestment Defensive Differentiation Concentric Gamesmanship Competitive Merger Liquidation Conglomerate Merger ES Retrenchment Turnaround ( FS = financial strength of the company; IS = industrial strength; ES = environmental stability; CA = competitive advantage of the company ) In order to enhance the use of SPACE (Strategic Position and Action Evaluation), two items: the relative importance of each factor (R) and the chance of sustaining the importance level of the factor (C) are added. A combined effect (E) is obtained by multiplying these two items. The ranges of total value for E is approximately 0 to 50. Total E Value Expectancy 0 - 10 low 10 - 20 low/moderate 20 - 30 moderate 30 - 40 moderate/high 40 - 50 high above very high The total E values indicate that the likelihood of maintaining a given factor is as shown above, whereas a basic SPACE analysis assumes they will continue at the current level in the future.
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